By Tiernan Ray

Goldman Sachs’s analysts Donald Lu, Simona Jankowski, Bill Shope and Robert Yen today dig into the implications of China’s roll-out this year of LTE broadband wireless connections, which much of the Street has been counting on to boost the fortunes of Apple (AAPL) and tons of other companies.

That build-out involves an awesome surge in the number of wireless base stations serving LTE in the country, led by the world’s largest wireless operator, China Mobile (CHL):

China Mobile (CM) is building the largest LTE network in the world and plans to deploy 530,000 LTE base stations by the end of 2014 (Exhibit 4), the largest LTE network worldwide, according to CM. In comparison, SK Telecom, the leading LTE carrier in Korea, only targets to reach 46,000 LTE base stations by end of 2014. If the Chinese government were to issue the FDD-LTE license to China Telecom and China Unicom in 1H2014 as we expect, China Telecom could deploy 95,000 LTE base stations in 2014 as well by our estimate. We estimate total installed LTE base stations in China to increase from 220,000 units in 2013 to 704,600 and 1,083,660 units in 2014E and 2015E, respectively. We forecast total LTE capex to increase from RMB42bn in 2013 to RMB132bn and RMB129bn in 2014E and 2015E, respectively (Exhibit 5). Total China telco capex is likely to peak in 2014 as Chinese telcos reduce their 3G investment and moderate their fixed line capex to focus on LTE going forward from 2015. Finisar JDSU Goertek LGE Freescale Alcatel Ericsson ARM.

Expect an explosion in LTE-enabled handsets as well, the authors write:

We estimate total China LTE smartphone sell-in to reach 142mn and 235mn units in 2014E and 2015E, respectively. CM, CT, and CU are targeting LTE smartphone sell-through of 100mn, 17mn, and 20-25mn units in 2014, respectively. Our supply chain checks indicate that CM’s LTE sales have steadily increased during January to April. More importantly, TD- LTE smartphone supply appears to be ramping quickly. For instance, CM already has 128 TD-LTE smartphones on sale. Currently, we are seeing TD-LTE smartphones selling for as low as RMB749. However, we believe the floor price of low-cost TD-LTE smartphones could decline further (e.g., 20-30% as per our checks with supply chain) ahead of the back-to- school sales in 3Q14. In 2015, we expect LTE to represent half of the total smartphone market in China. According to CM, when a sub switches from 3G to LTE, data usage typically increases by 500-600Mb on average, a significant increase from the average 3G monthly consumption of only 200Mb. Therefore, we would expect CM to launch new initiatives, such as changing its provincial KPI to promote LTE growth in 2H14.

The big picture is that equipment vendor and smartphone maker ZTE (0763HK), one of China’s local brands, listed in Hong Kong, and phone maker CoolpadGroup (2369HK) have the largest exposure to China’s LTE build-out, Lu and company believe, something they illustrates in the following chart (click for larger image):

ZTE is also a big beneficiary of the equipment build-out:

We estimate total China LTE smartphone sell-in to reach 142mn and 235mn units in 2014E and 2015E, respectively. CM, CT, and CU are targeting LTE smartphone sell-through of 100mn, 17mn, and 20-25mn units in 2014, respectively. Our supply chain checks indicate that CM’s LTE sales have steadily increased during January to April. More importantly, TD- LTE smartphone supply appears to be ramping quickly. For instance, CM already has 128 TD-LTE smartphones on sale. Currently, we are seeing TD-LTE smartphones selling for as low as RMB749. However, we believe the floor price of low-cost TD-LTE smartphones could decline further (e.g., 20-30% as per our checks with supply chain) ahead of the back-to- school sales in 3Q14. In 2015, we expect LTE to represent half of the total smartphone market in China. According to CM, when a sub switches from 3G to LTE, data usage typically increases by 500-600Mb on average, a significant increase from the average 3G monthly consumption of only 200Mb. Therefore, we would expect CM to launch new initiatives, such as changing its provincial KPI to promote LTE growth in 2H14. We estimate total LTE subscribers in China to increase from 3mn in March 2014 to 100mn in 1Q15, a significant contribution to the global LTE subscriber base of 200mn at the end of 2013, according to the Global mobile Suppliers Association.

Privately held Huawei, also a local China brand, is the other big beneficiary in equipment, with perhaps 30% share as well.

By contrast, “Ericsson, Nokia, Alcatel-Lucent, and Datang have less than 10% share each, as per C114.net.”

China’s LTE development is going to be the vast majority of Coolpad’s revenue, Lu and company write:

Coolpad (covered by Robert Yen) is the early domestic mover in LTE smartphones in China, with its products being the first among the domestic smartphone OEMs to be launched by three Chinese telcos. According to market research firm Sino-Market Research, Coolpad captured a 27% share of the LTE smartphone market in China in March, surpassing Samsung Electronics to take the #2 spot (only behind Apple). Since Coolpad has a broad product line that covers low-end to mid-range LTE smartphones and enjoys strong relationships with provincial CM subsidiaries, the company should benefit from CM’s strong demand for low-cost LTE smartphones. We expect its LTE smartphone product cycle to be its major growth driver in the next two years and a key competitive advantage for the company to continue gaining market share in China’s smartphone market. We estimate China LTE to represent 50-60% and 80-90% of total revenues at Coolpad in 2014E and 2015E, respectively.

LTE is still a coming boost to Apple, despite softness in the first quarter of this year, and it may add tens of millions of iPhone users this year:

In particular, the LTE build out serves as the primary fuel for Apple’s ramp at China Mobile, which we have previously cited as a positive catalyst for Apple’s shares throughout 2014. At the time of the announced deal with China Mobile in Dec 2013, China Mobile’s 3G subscriber base stood at 170 million customers, and we estimated this could add another 15-20 million units to Apple’s annual iPhone shipments. Now China Mobile’s 3G and LTE subscriber base stands at 228 million, highlighting the significance of the partnership […] China Mobile had only ramped LTE in 16 cities by the end of 2013 (and subsequently by the iPhone’s launch on the network), though the company expects to reach 340 cities by year’s end. As such, we view the ramp in LTE coverage as a key tailwind in 2014, with the trajectory of the ramp making the opportunity somewhat back-end loaded for Apple. This is particularly key, given the upcoming iPhone 6 refresh, as we believe this device will be a flagship component of the LTE ramp for China Mobile.

LTE may also boost the fortunes of the iPad in China:

Apple has had a lot of success in China since it first launched the iPhone for China Unicom in October 2009 and later added China Telecom in March 2012. More importantly, the iPhone momentum in China also stimulated momentum for Apple’s iPad and Mac products over the same period, providing a powerful halo effect for its overall revenue growth. As such, the LTE ramp should provide a much needed tailwind for iPad sales in the region, particularly in light of disappointing overall iPad shipments during the March quarter.

Samsung Electronics (005930KS) has a “stable” position in China, they note:

China, which accounted for roughly 20% of Samsung Electronics’ overall smartphone shipments in 2013, has represented a relatively low share of Samsung’s LTE smartphone shipments. However, we expect the China LTE portion should begin to rise in 2014 as LTE infrastructure is rolled out in China. As one of the world’s largest makers of LTE smartphones, Samsung Electronics (SEC, covered by Michael Bang) has also been a first mover in the China LTE market. With presence mostly in the high end market, we expect SEC will begin to offer more price competitive products (below US$200) LTE products in 2H14. Similar to its 3G smartphone strategy, we believe SEC will differentiate its products based on superior hardware specs at similar prices and the SEC brand.

Qualcomm (QCOM) can be expected to be a major beneficiary, even though he specter of a Chinese government investigation of its business practices weighs on the firm:

We expect Qualcomm (CL-Buy, covered by Simona Jankowski) will be a key beneficiary of the ramp of LTE handset sales in China, beginning in mid-2014, both from a chipset volume and royalty perspective. On the chipset side, we believe Qualcomm will capture a majority of chipsets for early LTE devices, driving incremental volume growth. In mid-March, China Mobile announced that it will require all TD-LTE smartphones to support five-modes (TDD/FDD-LTE, TD-SCDMA, WCDMA, and GSM). Qualcomm has the most mature and broad portfolio of five-mode SoCs. China Mobile has also established a target of 100mn TD-LTE devices in 2014. At the Mobile World Congress, Qualcomm disclosed that it has over 70 design wins in China. On the licensing side, TD-LTE represents an untapped royalty opportunity, as Qualcomm does not collect royalties on TD-SCDMA handsets in China (about 150mn units in 2013 or mid-30% of total China handset units). There remains some uncertainty around the ongoing investigation by the National Development and Reform Commission (NDRC) into Qualcomm’s royalty pricing practices in China. We believe it could be more related to negotiating the amount of royalties, rather than whether Qualcomm will be able to collect at all. Qualcomm already has more than 60 single mode OFDMA (LTE) licensees in China. In addition, China Mobile’s decision to support five-modes means that TD-LTE will be included on the same chips that are subject to Qualcomm royalties, due to their inclusion of other standards covered by Qualcomm IP.

China wants U.S. companies to hand them American technology free, so in a few years, Chinese companies can make competitive products. Huawei stole tons of knowhow from Cisco and 3Com. CEOs of many U.S. companies are stupid enough to fall for the Trojan horse.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.